China opens up to fertile startups

Chinese investors in search of a growth engine are pouring money into startup businesses.

According to a recent report by Shinhan Investment Corporation, as of last month there were 472 venture capital funds, nearly double the number compared to last year. There were 3,095 venture capital investments, which have been growing every year since 2012.

“While the world is in a low-growth state, there is a new breeze of investing in startups in China, which is in search of a new growth engine,” said Kang Hyo-joo, a Shinhan Investment Corporation analyst.

“Considering how the changes in Chinese economic structure affects Korea’s own industrial growth, there is a need to evaluate where China’s ‘smart money’ is heading.”

Smart money refers to investments that quickly move accordingly to a changing market. The main goal is high yield.

The intended character of the investment is that it moves one step ahead of other investors, picking up anything that is lucrative.

According to the analyst, venture capital investment in China is concentrated in Internet, telecommunication and IT. The approach is led by so-called TABLE investors. TABLE refers to leading Chinese IT companies, Tencent Alibaba, Baidu, Xiaomi and Qihoo 360 Technology.

These companies are particularly interested in Internet education, mobile Internet and electronic education.

Venture capitals this year invested $3.67 billion in seven new industries designated by the Chinese government. There are also active investments in private equity funds and mergers and acquisitions.

Investment in private equity funds in China broke new records after reaching $86.9 billion.

Additionally, as the Chinese government stepped up its efforts to reform and restructure state-owned companies, the Chinese M&A market saw a significant increase to $150.7 billion.

“Even investments made in private equity funds and M&A are mostly concentrated on Internet, telecommunication, IT, pharmaceuticals and environmental technology industries,” the Shinhan Investment Corporation analyst said. “Especially private equity funds and institutional investors are increasing their investments in the environmental technology area.

“Such investments are not limited to China but are expanding to other overseas companies specializing in telecommunications, media and IT, which are similar to the investments that they are making in China.”

The analyst said it is becoming more evident that the investment trend in China is shifting towards the convergence between smart money and technologies.

“A stable investment environment is being presented as the [Chinese] government’s support is expanding while the routes in recovering investment are getting diversified,” said Kang.

Kang said the Chinese government has been coming up with new policies to attract investments, including the establishment of the New Third Board - an over-the-counter exchange exclusive for small and midsize companies as well as startups - as well as reforming state-run companies and a strategy to create new industries.

The analyst noted, however, that there are concerns of a China’s dot-com bubble. Kang said Korean investors have to pay attention to the new Chinese market trend, especially since Chinese startups, as the market of 1.3 billion consumers has the strong
possibility of competing with Silicon Valley.

BY LEE SEUNG-HO [lee.hojeong@joongang.co.kr]